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Tuesday, January 3, 2017

Brian Romanchuk — Primer: Inflation Versus Rising Prices

One source of complexity in economic discussion is the ambiguity of the term "inflation." The usual definition is that this is the rate of growth of a price index of consumer goods (such as the CPI). However, economists quite often distinguish sustained rises in the price index versus one-time shocks. Unfortunately, it is difficult to determine whether a rise in prices is going to be sustained. For this reason, it is useful to avoid discussing generic inflation, and use more precise terminology....

5 comments:

Government statistics have always been subject to all kinds of fudges, with unemployment being the most obvious. Here in the UK, the unemployment figures were fudged by moving huge numbers into the disability category.

Not wishing to sound like someone advocating groups like shadowstats or wackos like Schiff, but could there have been a similar effort to fudge inflation numbers? Opposing groups like the billion prices project vehemently deny any mucking around with the stats.

Please chime in with your two cents (whether devalued/overvalued/on-the-money?). Are there better measures of inflation than we currently have? Only MMT-friendly humanoids welcome to comment.

In the USA, there have been big fights over inflation calculation, because of the effect on cost of living adjustment to social security. Teddy Kennedy valiantly and mostly successfully mitigated them - when he was alive. Look up Boskin Commission.

There are "known issues" with things like CPI calculations, but the people doing the calculations face tradeoffs. Generally speaking, most people in the markets accept them as-is; otherwise, you just end up cherry picking anecdotes. Things like GDP deflators are more problematic, but they were designed for measuring growth rates, and not the cost of living.

In the US, the feeling is that the CPI overstates inflation slightly. This is why the government made various changes (the big ones were associated with the Boskin Commision) to reduce the bias. I am agnostic about the boas; it would take decades to see the difference, and it is unclear how comparable price levels are over such long time separations.

The takeaway for most people is that inflation is 1) not an observable but rather a result of computation based on assumptions and there is no one way, or best way to do this, and 2) "inflation" is a weasel word in that it has various denotations from technical definition to ordinary language uses and it also has connotations that carry emotional charge, which is used in persuasion.